Dairy Crest has added significantly to its liquid milk portfolio with the £33m purchase of Express Dairies from Arla Foods.
The 390m-litre business includes 100m litres of doorstep deliveries and 290m litres of middle-ground sales to smaller retailers and foodservice customers like hospitals and schools.
It is serviced by 77 distribution depots with dairies in Liverpool and Nottingham.
Combined with Dairy Crest’s existing 200m litres of doorstep business and 380m litres of middle-ground contracts, the deal makes the milk processor the biggest player in the sectors, with 2m customers, said chief executive Drummond Hall.
For the year ending 30 September, 2005, Express Dairies made a pre-tax profit of 7.2m on a turnover of £229m.
Middle ground is also a highly competitive marketplace and pressure there has often been blamed for farm-gate price cuts.
Arla Foods’ chief executive Tim Smith said rationalisation had been necessary for some time and the firm would be concentrating on building its brands.
“We determined that a sale was the best value-creating alternative for our shareholders.”
But Dairy Crest believes it has a better business model than its competitors and said the purchase would be highly cash-generative, with increased efficiency savings peaking at £9m in 2008/09.
Members of Dairy Crest’s and Arla’s direct supply groups will initially be unaffected by the sale.
Jonathan Ovens, chairman of the Arla Foods Milk Partnership, said none of the milk processed by Express Dairies came from his members.
But the move means AFMP will now supply almost 100% of Arla’s milk, and this could have an impact on the group’s bargaining position, he added.
Express Dairies’ existing milk procurement contracts, mainly serviced by Dairy Farmers of Britain and Meadow Foods, would remain in the short term, said Dairy Crest’s milk buying director Arthur Reeves. But he hoped direct supplies would be used some time in the future.
Tom Hind, the NFU’s chief dairy adviser, said the deal looked good news because it might reduce the intensity of competition in the middle ground.
However, he doubted it would release any of the pressure on milk prices.
“It’s just the tip of the iceberg in terms of the rationalisation the industry needs.”